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Should you pay debt before saving?

Should you hold off on saving until your nonmortgage debt is paid off?

Simple math suggests it's better to get rid of debt before saving for retirement or an emergency fund. After all, if the savings rate is 1 percent and you have credit card debt at 14 percent interest, money is better spent paying down debt quickly.

But personal finance decisions are rarely so simple, and this method may not be the right choice for everybody.

"Like everything else in life, this decision is one of balance, not of absolutes," says Michael Rubin, president of Portsmouth, N.H.-based Total Candor, a provider of financial education.

Dean Barber agrees. The host of nationally syndicated talk radio program "America's Wealth Management Show" says there are pros and cons to each approach.

“Like everything else in life, this decision is one of balance, not of absolutes.”

"You have to set your priorities ... and understand the consequences to either paying debt first or saving money first," says Barber, who is also president of the Barber Financial Group of Lenexa, Kan.

So which should come first -- paying off debt, or saving?

Paying debt before saving

The notion of saving before paying high-interest debt is hard for some financial advisers to swallow, given the math.

Donna Fox, author of the book "From Credit Repair to Credit Millionaire," says low interest rates on savings accounts make paying off debt first a better choice right now.

"It's simple mathematics," she says.

Too many savers ignore the math and instead opt for a false sense of security, Fox says.

"People get into trouble with debt and finance when they start letting emotions vote on their outcome," says Fox. "So they feel better if they have a cushion in their savings account, even though for most people it's not the financial savvy thing to do."

She cites the example of someone who has $10,000 in savings (earning 2 percent) and $10,000 in credit card debt (at a rate of 9 percent). Anyone pleased with this situation is misguided, Fox says.

"This is like investing your $10,000 in an investment you know will lose 7 percent a year ... and being happy about it," she says.

Instead, the debtor in this example should pay down obligations as quickly as possible.

"You then have the free and clear (credit) card available as a cushion in case something goes wrong," she says.

Barber says savings are important, especially as part of an emergency fund. But he agrees with Fox that paying down debt first sometimes makes more sense.

He gives an example of a 50-year-old with $20,000 in credit card debt, $200,000 in 401(k) but no cash reserves.

"If you use the reasoning of needing cash reserves, you will incur more debt because interest is compounding on that $20,000," says Barber.

If this same person has $1,000 in disposable income per month, and if the entire amount is put toward the credit card (at 12.5 percent interest), the card can be paid off in 2.5 years, he says.

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"At that point, the person can then start saving," says Barber.

Saving before paying debt

However, others disagree with paying down debt before saving. In particular, they stress the importance of building up an emergency fund before eliminating debt.

Having a stash of emergency cash is more important in today's economic times of tight credit, says Sarah Place, president and CEO of Place Trade Financial, a full-service, discount brokerage firm based in Raleigh, N.C.

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